Benefits Buzz

Healthcare FSAs Permit $500 Rollover

Posted on November 7th, 2013

The U.S. Department of Treasury recently issued guidance announcing a significant change relating to Healthcare Flexible Spending Accounts (FSAs) that has many positive implications. The Department of Treasury has modified its “use-it-or-lose-it” provision to allow a limited rollover of unused Healthcare FSA funds. Effective immediately, employers that offer a Healthcare FSA program without a grace period have the option of allowing employees to rollover up to $500 of unused funds at the end of the 2013 plan year. 

Healthcare FSA plans that have grace periods allow participants to carryover their entire unused balance at the end of the plan year, but only for a maximum period of 75 days. After the 75 day time period any unused funds are typically forfeited. Rollover differs from grace periods by allowing up to $500 to carryover for the entire following plan year. Employers cannot offer both the grace period and a rollover. 

Here are some additional highlights and other information as it relates to the new guidance:

  • Employers offering a Healthcare FSA program with a grace period have the option of allowing employees to rollover up to $500 of unused funds at the end of the 2013 plan year; however, the employer would need to eliminate the current grace period for the Healthcare FSA. 
  • The employer can keep the grace period for the Dependent Care FSA even if they eliminate it for the Healthcare FSA.
  • The employer chooses the amount of the rollover up to $500. The rollover funds can be used to reimburse qualified medical expenses incurred during the entire plan year to which it is carried over. 
  • The amount eligible to be rolled over is the amount unused after medical expenses have been reimbursed at the end of the plan’s run-out period for the plan year (up to the $500 limit).
  • The rollover amount does not count against the indexed $2,500 salary reduction limit. Participants will therefore be able to rollover up to $500 and still make a salary reduction of up to $2,500 into their Healthcare FSA for the plan year. 
  • The employer cannot allow participants to cash out the rollover amount or allow the amount to be used for any other benefit.

Other Considerations

  • The Healthcare FSA, under Code Section 125, must be amended to implement the new rollover provision. The amendment must be adopted on or before the last day of the plan year and may be effective retroactively to the first day of that plan year. 
  • If the plan currently includes a grace period, the plan must also be amended to eliminate the grace period provision by no later than the end of the plan year. 
  • If the employer adopts the rollover, all participants will be eligible for the rollover.
  • Employees that rollover Healthcare FSA funds into the next plan year will not be eligible to contribute to a Health Savings Account (HSA). 
  • If an employee does not elect to re-enroll in a Healthcare FSA for the next plan year, the rollover may still be carried over to the next plan year if the employer plan permits.  

Flexible Benefit Service Corporation (Flex) will accommodate this new option for our Healthcare FSA plans. We will be providing additional information as we review this guidance in more detail.

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Note: The materials contained within this communication are provided for informational purposes only and do not constitute legal or tax advice.    

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